The key to understanding technical stock analysis is to understand how technical analysts view the world.
There are three premises that technical analysts rely on when they trust technical analysis, according to John Murphy:
1. Market action discounts everything
2. Prices move in trends
3. History repeats itself
This is in contrast to the academic view of the world, in which the markets are efficient, meaning that all the available information is already discounted into the prices, including any information that can be derived from technical analysis and historical asset prices.
Of the first, the basic premise of market action including all available information is why technical analysis traders do not do fundamental analysis, as all fundamental information is discounted to the market action.
The idea that prices move in trends is also essential to technical analysis.
Some traders explain this through kind of developing store point-of-view. More and more evidence to a certain direction of an asset class reaches the market, strengthening a movement of an asset price into one direction, which then becomes a trend.
As all information from fundamental analysis is discounted immediately, the trickle of news leads to a smooth trend.
As for the final basic idea behind technical analysis, that history repeats itself, is the very core of some methods, such as chart reading technical analysis, which identifies patterns in the chart formation that are used to predict whether the trend will change, for example.
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